Chapter 7 NoteSheet

Chapter 7 NoteSheet - CHAPTER 7 Individual Income Tax...

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CHAPTER 7: Individual Income Tax Computation and Tax Credits Regular tax computation dependent on filing status, and progressive tax rates Marriage penalty or benefit: when both spouses receive income they will likely have a penalty and when only one spouse receives income they will have a benefit. Exceptions to ordinary tax rate: Long-term capital gains (net capital gains) generally 15% but can be as high as 28% or as low as 0%. Qualified dividents generally taxed at 15% but could be taxed as low as 0%. Two different tax rates on one gain/dividend is possible. Alternative Minimum Tax: Items commonly added back to regular taxable income in computing AMT income are personal and dependency exemptions, state income taxes, real property taxes, home-equity loan interest expense (if proceeds not used to improve home) Miscellaneous itemized deductions in excess of 2% floor AMT is a tax based on an alternative more inclusive tax base than regular taxable income. Meant to ensure that taxpayers are paying minimum level of tax. Taxpayers hit hardest by AMT (1) have many dependents, (2) live in a high income tax state, (3) jpay high real estate or other property taxes, (4) have relatively high capital gains Why AMT so prevalent? Exemption amount and phase-out threshold are indexed for inflation, individual tax rates have been decreasing Employment and Self-Employment Taxes: FICA taxes consist of two components –social security tax (12.4-wage base limited to 106800 in 2010) and medicare tax (2.9-no wage base limitation) Employment FICA Taxes: employee must pay FICA taxes on compensation from employer. If an employee holds multiple jobs in a year, they can receive aggregate compensation that exceeds the Social Security wage base. Employer must pay ½ of employees FICA tax—witholds FICA tax from employee’s paycheck Self Employment Tax: (1) compute net schedule C income (generally) and multiply by .9235 – this equals net earnings from self-employment (2) Determine Social Security tax 12.4% and medicare tax 2.9%--106800 limit applies to social security portion. If net earnings from self-employment < 400, no SE tax. Employee vs. Independent Contractor: Differences: (1) employees have less control over when, how and where to perform duties (2) employees pay 6.2 percent SS and 1.45 percent Medicare and SE pay 12.4 percent SS and 2.9 percent Medicare. (3) SE tax base is .9235 times SE income. (4) deduct half of self-employment taxes paid for
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